ISSUE 6 Feb 2011
Monthly Market
Update
Matthew
Sharratt
In Your Dreams
Why Aren’t you getting the results
you want from your trading?
Trading With a Single In / Scale Out Method – Part 2
Protecting Your Ass(ets)
Developing a System
Compounding Profits in the Market – Part 2
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MARKET UPDATE p5
Matthew Sharratt
TRADING ARTICLES
Graeme Pearson
Why Aren’t You Getting The Results You Want From Your Trading? p11
Louise Bedford
In Your Dreams p15
Jason Cunningham
Protecting Your Ass (ets) P17
Gary Stone
Compounding Profits in the Markets –Part 2 p19
Ross Beck
Trading with the Single in/ Scale out Method – Part 2 p23
Van K. Tharp, Ph.D.
Developing A System p29
REGULARS
Did You Know? p 14
News & Events p22
Quotes to Inspire p28
Trader’s Library – Book Review p32
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Wow, we can’t believe it is already February! We hope you enjoyed the holiday season and have had a good chance to catch up with your family and friends. Hopefully you have spent some time working on your goals for 2011 and you are taking some action each day to move towards them. You would have received a FREE Your Trading Solutions Trading Journal with the bonuses and if you haven’t started to go through it and plan your year now would be a good time. Don’t be like a ship without a rudder, get cracking and get some idea of where you want your trading to be at the end of the year. In this issue we have our regular contributors Matthew Sharratt from Kinetic Securities, Van K. Tharp from The International Institute of Trading Mastery, Louise Bedford from The Trading Game, Gary Stone from Share Wealth Systems, Jason Cunningham from The Practice and yours truly Graeme Pearson from Your Trading Solutions and a second article from our new contributor Ross Beck from Market Analyst. I’ll be asking the question about why you aren’t getting the results you want from your Trading and I’ll share the four main reasons I have found in my research and with my coaching clients as well as giving you some practical exercises for you to overcome any obstacles. Louise Bedford shares her perspective on the realities of being a Trader. Our accounting guru, Jason Cunningham presents an excerpt from his book “Where’s My Money” about how to protect your Assets. We conclude Gary Stones series on Compounding for Profits with Part 2 of his article and we also share Part 2 of Ross Becks’ series on Trading with a Single In ‘/ Scale Out Method. Finally we conclude the Tharp series on developing a system where you will discover how to make decisions within the System. We hope you have been enjoying the issues of the eMagazine so far. We would love any feedback and if you enjoyed the issue and have any friends or associates who you think would enjoy it also just send them this link www.yourtradingsolutions.com/free_ezine If you let us know that you informed a friend we will send you a special gift to say thanks. Great Trading!
Graeme and Natalie Pearson
Note: Articles have be reprinted in the English language supplied
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Contributors
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Cunningham, Graeme Pearson, Matthew
Sharratt, Gary Stone, Van K. Tharp.
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Late January Jitters as volatilty returns Market Update January 2011 Growing fears over the political unrest in Egypt sent equity markets into a spin late January and as of 28st major stock indices had given back most of their January gains as volatility moved back into world markets. The Egypt situation caused major moves up in the price of Oil and Gold which, in the latter case, came as welcome relief as Gold prices had been falling heavily throughout the month.
Market Wrap
Market Change
S&P500 +1.49%
ASX200 +0.34%
Gold -5.54%
US$ +.56%
AUS$ -3.29%
Commodity Index +0.39%
US 30 Year Treasury Bonds -0.72% Prior to this markets momentum had started to slip which is no surprise as we have had a good four month run. We are now seeing signs the bulls might take a breather here and stocks may slip back. As I reported last month, February historically can be a bad month for equities and given the strong rally running into this period the bulls may now run for cover, for a few weeks at least. S&P500 Last week’s price action shows momentum running out of the rally with a bearish reversal bar forming. I am looking for a pull back of over 6% on the S&P and I have marked a possible support zone on the chart below. A correction here is actually a good thing; markets were getting ahead of themselves and a healthy bull market needs an orderly corrections to allow big institutionally money to buy in again.
Contact Details
Matthew Sharratt Portfolio & Investment Manager
Kinetic Securities
Email:
Phone:
02 9295 9810
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Economic reports were generally good with declining jobless claims and improving home sales. Earnings reports amongst large cap stocks were good – IBM (IBM), Apple (AAPL), Google (GOOG) and General Electric (GE) all stood out but some poor bank results and worries China would take action to cool an overheating economy had the bears pinning the bulls down by month end. Stock News – Apple (AAPL) From a stock perspective Apple (AAPL) was in the news in January. Apple’s CEO, Steve Jobs, announced he would take extended medical leave for the third time since 2004. When the market opened following this announcement Apple was down 15% but then traders came to their senses and it finished the day only down 2%. Listening to the Apple earnings calls it is clear that although Jobs is the visionary, Tim Cook has been running the retail and operational show behind the scenes for 5 years and Jonathan Ives is the design genius Jobs gets most of the credit for. It is perhaps for these reasons investors realised the loss of Jobs for some time would not set this company back. The Apple story is an interesting one. Long in the shadows of Microsoft it moved out of the realm of purely art directors and into mainstream with the invention of the iPod. If you think about it now, it is amazing the company started its surge with a simple device that only played music. There were a lot of other MP3 players at the time, but the iPod was different enough to catch your eye.
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The company had a vision that design mattered but it took a long time for investors to appreciate this vision and Apple shares did not really take off until 2004. The reason was because investors were not convinced Apple could manufacture and distribute its products well enough. Then the iPhone came along in 2006. The initial reaction was muted but again Jobs’ design vision won the day and the company’s newfound ability to manufacture won the respect of Wall Street. Apple has come a long way since it was trading at below the value of the cash on its books back in 2001 but these days it has become such a market heavyweight (second only to Exxon Mobil) it seems to just move with the market. Even a 70% increase in earnings was not enough to buck this trend as Apple has since fallen following the earnings announcement.
Where to from here?
Last year the market rallied early on and peaked on January 19th. It then fell until February 5th, wiping off 7%, could we repeat 2010? Let’s take a look around the world and see what is happening to stocks on a global scale. Instead of listening to opinion and guesswork, let’s take a look at what is really happening. China – the worlds supposed growth engine. In January the Chinese announced their economy grew at 9.8% versus 9.4% expected and inflation came in under forecast too. This should be good. It is the ideal situation, growth without inflation. So you would expect stocks to rally right? Well, they didn’t. Chinese stocks fell. In fact Chinese stocks have been falling for months. Clearly the Chinese don’t think stocks are going to have a good year. Maybe they haven’t been listening to the bank analysts. A move we believe everyone should make. The fact remains, stocks fell in the face of positive news. This marks a change in sentiment where the market is now likely to ignore good news and jump all over bad news.
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When you talk about China you should also consider Brazil, India and Russia. These make up the BRIC countries and the drum everyone has been beating for years. Here is the Brazilian stock market. Again you can see it has been falling for several months
How about India?
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See a story developing here? Finally Russia
Russia is the only BRIC country still clearly in an uptrend. But how often have you heard the media tell you Russian stocks are outperforming Chinese stocks? If the BRIC countries are not rallying it means they do not expect growth from their own stocks. No growth means they do not expect their economies to grow. This will leave the US to find growth from within its own borders. Although the growth is happening it is not growing fast enough Stocks have rallied hard on expectations of a good year for both company earnings and economic growth. We have seen company earnings slowing in the last week and a shift in sentiment with stocks selling off on good economic news. Looking at the difference between large and small caps we see money rushing out of small caps but large caps still holding on. This is usual at a market top as fewer and fewer stocks manage to hold on. Therefore I believe sentiment has shifted and equities are about to take a short term dip, very much in the pattern of last year, except this year we might fall for a little longer as we have rallied longer on the way up. The market often repeats mirror images of moves so we would not be surprised to see some weakness come in until the end of February If you are a short term active trader, do not take any long positions here. You probably have a lot of longs on right now anyway, so look to take preventative action. For long term holders, this should not be a major drop and you can ride out the volatility. But things are going to get interesting for a few weeks
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Until Next Time...Happy Trading
Matthew Sharratt is a Portfolio and Investment Manager with Kinetic Securities in Sydney. The views expressed are his and not necessarily the views of Kinetic Securities. The information given is general and you should consider the information carefully in light of your current financial situation. You can contact Matthew and his team (02) 9295 9800 or email [email protected] Disclaimers Kinetic Securities Pty Ltd (ABN 83 120 225 149) holds an Australian Financial Services License (AFSL No. 309743). Any advice
included in this document is general advice only, based solely on consideration of the investment or trading merits of the financial product/s alone, without taking into account the investment objectives, financial situation and particular needs (i.e.
financial circumstances) of any particular person. Before making an investment or trading decision based on the advice, the recipient should consider carefully the appropriateness of the advice in light of his or her financial circumstances. This
communication is for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any
financial instrument or as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. Any comments or statements made herein
do not necessarily reflect those of Kinetic Securities Pty Ltd.
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Why Aren’t You Getting The Results
You Want From Your Trading?
Graeme Pearson
Plan your trade and then trade your plan. It is a well known adage in the world of trading. If it is so well known and deemed to be very important then why do many traders not follow their system and what can be done about it?
As a result of working with a number of coaching clients and through my own research there are four main reasons I have found why traders don’t follow their trading plan.
They don't trust their system
They don’t trust themselves
They lack discipline
They are responding to an emotional trigger.
Let’s look at each of these causes in a little more depth.
Don’t trust system
This is usually the result of trading a system which has been purchased. The original purchase was probably made due to the system promising the world or some marketing hype. So the system is purchased and typically traded on blind faith without any research or testing of the system. Somewhere down the track the trader will get some losses and because there hasn’t been any testing of the system across a range of market conditions doubt starts to creep in to their trading. This is the point at which they can start to diverge from their trading plan and start locking in profits as soon as they become available or bailing out of trades as the price approaches the stop loss only to see it turn into a profitable trade.
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As implied above the way to resolve this is to do some research or testing of your system. I recommend the back testing of their system to my clients over a period of time which is relevant to their system to capture a range of market conditions.
Don't trust self
A lack of trust or self belief can also result in not following your trading plan. What belief system you have can override any evidence that you can trade successfully. You can teach a person a profitable trading system and actually observe them applying the rules correctly when consciously going through the steps but if they have a belief of “I can’t trade profitably” or “I always lose when I trade” that will dominate until it is addressed. Unless you make specific effort the majority of your actions are carried out on an unconscious level. With your beliefs typically operating at an unconscious level they will tend to determine the outcome of your actions.
An exercise you can do is to list 50 or more of your beliefs. Once you have that list determine which ones are helping and which one are hindering your trading. Then work on eliminating those which are hindering your trading or better still get a coach to help you work through your limiting beliefs.
Responding to an emotional trigger
The sort of stimulus response types of reactions have typically been formed long before you even considered becoming a trader but can now affect how you make decisions. There can be many stresses that arise through the process of trading and our response to those stresses can have a large bearing on your success. How you have coped with past conflicts can play out in your trading. If your pattern has been to react in anger in your relationships of past then this can show itself in your trading. You may have felt inadequate in your parent’s eyes and this is now how you respond to trading losses. These maladaptive patterns are probably not the most conducive to profitable trading. Most of these patterns you are typically not aware of and they continue to play out in your life.
An important tool to use is a trading journal to monitor your primary thought, feelings and behaviours in these situations. This can help make the unconscious conscious as until you are aware of them you can’t change them. Some examples of responses you want to look out for are feelings of inadequacy, rebellion, failure, discouragement, rejection, anger and frustration. When you experience them monitor what result they have on your trading results.
I have created a Journal specifically for traders to work through these behaviours and to set your trading and personal goals. If you didn’t get your free copy of the Your Trading Solutions Trading Journal in the bonuses you can download it directly NOW from:
www.yourtradingsolutions.com/free_ezine/Trading_Journal.pdf
Lack of discipline
This is one of the most written about subjects in trading. It is a topic which would be mentioned at one point in almost every trading book and is deemed to be one of the most important qualities for a trader to have. Possibly a more important quality would be persistence which I think discipline stems from anyway.
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As Napoleon Hill from Think and Grow Rich says “persistence is to the character of man as carbon is to steel”. Once a habit is formed there is really no need for discipline it happens naturally anyway. It is the persistence to keep on doing an action until it becomes a habit which is the key. Habits can take somewhere between 30 to 90 days to form and during that time you need to persist.
To help with your persistence you can use the pleasure and pain principle. Create an image in your mind of the consequences of not following your trading plan. What does it look like if you continue with that behaviour 5 years down the track? How will that affect your family and how will you feel about yourself? On the flip side what does it look like if you follow your plan perfectly? How will you feel achieving your goals and how will that affect you and your family?
Once again you can work through this in the Trading Journal.
Any or all of the points we have looked at can affect the way you trade and sometimes you aren’t even aware of the reasons. Each area can be like a barrier to you achieving your goals and they can be difficult to detect on your own especially if they are deeply ingrained in who you are, your beliefs and your habits. The only real way of knowing is to look at your results and if your not getting the results you would like from your trading on a consistent basis then perhaps it is time you asked for some assistance to work through each area, identify your limitations, determine where you may need some change and create a plan that will help you to move forward. Don’t let pride stop you from achieving your goals.
About the Author: Graeme Pearson is a Professional Trader and Trading Coach for Your
Trading Solutions. Since resigning from his Full-time job as a Mechanical Engineer back in
2006, Graeme realised that although he had reached his goal of financial independence
something was still missing. Graeme found that he gained great pleasure in helping others
and particularly when that help involved trading. Graeme now utilises his trading
experience, Neuro Linguistic Programming and coaching training to combine mindset and
methodology to help other traders become the best they can be. For more information
about coaching contact Graeme at: [email protected]
If you would like help in any of the areas we discussed in this article or you’re just
not getting the results you want from your trading system I can help. For a limited
time I am offering a FREE 30 Minute Introductory Coaching Assessment for new
clients valued at $140. Book your FREE assessment NOW:
Email: [email protected]
Phone 0400482653
Offer Valid until 28th February 2011
Jesse (Lauriston) Livermore
Jesse Livermore was a famous American Stock market
Investor and Influential Stock Trader of the 20th
Century. He was born on the 26th July 1877 and died by
his own hand on the 28th November 1940
Follow the Rules
Jesse Livermore was worth $3 million and $100 million after the 1907 and
1929 market crashes, respectively. He subsequently lost both fortunes.
He claimed that his lack of adherence to his own rules was the main reason for his losses after making his 1907
and 1929 fortunes
Wikipedia
Read More
Reminiscences of a Stock Operator by Edwin Lefèvre – reflects on many of
Jesse’s lessons as a Stock Trader
In 1929 Jesse Livermore had a net worth of
US$100 Million
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In Your
Dreams …
- Louise Bedford
Once upon a time there was an intelligent guy with movie-star good looks. He traded the
stockmarket for a year and then, at the age of 42, left his job as a NASA astronaut to be a full-time
trader. In his first six months, he made twice his usual salary and laughed merrily.
Then he took a two-year holiday on his fabulous shiny yacht in the Mediterranean, with a harem of
beautiful, scantily clad girls half his age. Trading was so much easier than he had ever expected...
Quick reality check - this is a fairytale. It will not happen to you. There is a popular myth that trading
is more like a trip to the fun park than a job. I hate to burst your bubble, but trading is a precise and
somewhat boring activity, where decisions are made long in advance of any contact with the market.
The world's best traders realise this, and they plan with meticulous care. This approach may not
appeal to those who believe that trading should be frantically yelling "buy" or "sell" to your broker
on a mobile phone while admiring the upholstery on your new Porsche.
Trading has a way of forcing you to bare your soul. It will make you come face-to-face with your
inadequacies. The stockmarket tends to highlight all of your flaws while minimising all of your
strengths. Sounds like visiting your mother-in-law, doesn't it? Only the persistent and emotionally
strong will ultimately achieve trading prowess.
You'll also need a significant tolerance for following a routine mechanical system. Only traders who
define their plan and re-evaluate it consistently can hope to make consistent returns. Before you
quit your job or business to be a full-time trader, you should consider how you would handle the
isolation. There may be times when you will want to dial 000, purely to hear the sound of another
human's voice.
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Some people also have trouble organising their time, especially if they are used to being kept on a
tight leash by an employer. To get incredible trading results, you must commit an incredible amount
of work.
To create a business-like profit, you cannot treat trading like a hobby.
The best investment that you can ever make is in yourself. If you look at successful people from all
walks of life, you'll see that this philosophy acts as their common denominator. Trading follows this
principle to the letter.
There are benefits to full-time trading. If you are successful and consistent with your approach, you
can catch up on the sleep that you missed over the past decade and reacquaint yourself with those
small beings that share your household, commonly known as your children.
On about the third day of full-time trading, you may even come to the realisation that day clothes
are completely unnecessary. Pyjamas are a much more comfortable trading attire and because the
market doesn't open until 10 in the morning, you can sleep in without fear of being late for work.
Trading is more like a marathon than a sprint. If you're out for the glamour of the quick dollar, your
hard-earned capital will quickly be redistributed into the hands of the professional traders.
You can cheat a little on your dreams every day and no-one will notice... except you. If you haven’t
yet got an effective written trading plan – you need one. Traders who trade without a trading plan
deserve to starve. Go to my website www.tradinggame.com.au right now and register. I’ll send you
my trading plan template and a free 5-part e-course. The game is on. Nobody knows how long your
ride will last, but I can tell you – without a trading plan, your chances of survival are zip.
Louise Bedford (www.tradinggame.com.au) is Australia’s best-selling author of books on the
sharemarket. Her titles include The Secret of Writing Options, The Secret of Candlestick Charting,
Trading Secrets and Charting Secrets.
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This excerpt is taken from Chapter 11 of Jason’s book “Where’s My Money”; a book
packed with practical tools and real-life examples to help you take charge of your financial
future and make your dreams a reality. For you copy purchase online at
www.wheresmymoney.com.au
If you own, run or operate a business, or you have some form of investment or personal asset(s),
such as a property or shares, I’d almost slap you if you didn’t have the appropriate ownership
structure.
Types of asset structures
The reason ownership structure is so important is because the correct structure will provide you
with asset protection, flexibility and estate planning. There are four structure types available:
Ownership in an individual’s name
Company ownership
Trust ownership
Ownership using a self managed superannuation fund
Ownership in an individual’s name
Owning the asset in an individual’s name, the most common strategy, provides minimal asset
protection. You can use the strategies mentioned earlier to limit your exposure, but you have no
flexibility. It does, however, provide a reasonable level of estate planning – as long as you have a will
that is accommodating.
Company ownership
Ever wondered what PTY LTD stands for? Proprietary Limited. The liability of the proprietors (the
owners) to external creditors is limited, based on the paid up capital of that company. ‘Paid-up
capital’ basically means the ‘paper’ value of the company.
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You may have heard the term ‘$2 company’. Here, the company has two shares worth $1 each. Two
shareholders contribute $2 – the total paid-up capital of the company. The most someone suing you
would get would be $2. Company ownership provides reasonable asset protection.
However, there are times when directors can be held personally liable, such as when they have
signed a personal guarantee statement or have knowingly traded the company while insolvent. Also,
there are certain circumstances where the Australian Tax Office can hold you personally liable for
the company’s tax debts (but that’s another book on its own).
Trust ownership
A trust has a similar legal status to a minor (not the Todd Russell and Brant Webb variety; I mean
children). Minors can’t really own assets – that is, you can’t put assets in their name. However, their
mother or father, as guardian, can own assets on their behalf. Therefore trusts require a guardian –
or, in this case, a trustee – to act in its best interests. The role of a trustee is to administer the trust
and make decisions on behalf of the trust.
There are four main types of trusts:
Discretionary (family)
Fixed (unit)
Hybrid
Other (including testamentary trusts and bare trusts)
One of the exciting things about trusts is they don’t pay tax. The tax rate is 46.5 per cent for the top
individual marginal tax rate, 30 per cent for a company, and 0 per cent for a trust. You read it right:
zee-row! The trustee, on behalf of the trust, distributes any profits to the beneficiaries who
subsequently pay the tax. So a trust allows us to legally split our income with other family members.
Ownership using a self managed superannuation fund
Self managed super funds (SMSFs) are highly popular in Australia. At the time of writing, there are
roughly 400,000 SMSFs in Australia. Crunch the numbers: there are 21 million people in Australia, of
which less then half pay tax. These 400,000 SMSFs are owned by eight million people, which is quite
a significant number of people (around 5 per cent of tax payers) in control of their own super funds.
With a SMSF, your money is still in super, but rather than being in a superannuation trust run by
someone else (such as an industry, retail or wholesale fund), it’s your own fund.
About the author: Jason Cunningham
Jason Cunningham is a qualified CPA and financial planner with his own financial planning license. In
1997, Jason co-founded accounting firm The Practice, www.thepractice.com.au which provides
accounting, taxation, business consulting, financial planning and finance solutions to a wide range of
clients. Jason has extensive experience in helping a wide range of clients grow and manage their
financial affairs. A crucial part of his role and the area he is most passionate about is to help his
clients identify and understand their needs and objectives, and give them the tools to reach their
goals. Jason’s specialty is the complex world of trading and tax; he has run numerous workshops
and seminars for various share and option trading groups.
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Compounding Profits in the Market – Part 2
Gary Stone
Basics of compounding
Following on from my article in the January Issue of Your Trading Solutions, I felt it very important to continue our discussion on the positive effects that compounding can have on an active investment portfolio.
A simple way to look at the effectiveness of compounding is to use a mental maths shortcut known as the “Rule of 72”. For those that have not heard of the mathematical principles of the Rule of 72, it allows you to very quickly estimate the compounding effect of any growth rate, from house prices to financial performance. Primarily it allows you to estimate the time a value takes to double. The following examples are useful for calculating financial estimates and understanding the true nature of compound interest.
With an interest rate of 5% per annum, your money takes 72/5 or 14.4 years to double. To double your money in 10 years, you require an interest rate of 7.2% per annum, which is
72/10.
Rule of 72 applies to anything that grows, including interest, inflation and even our population growth. A change in political policy from a growth rate of 3% vs 2% could be a huge problem for planning. Instead of needing to double the country’s services capacity in 36 years, this 1% per annum difference has shorted the time period to 24 years. Twelve years were shaved off the schedule with one percentage point.
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How does compounding relate to active investing?
This same rule when applied to portfolio growth in the stock market provides Active Investors with an extremely powerful tool. As it was mentioned in last weeks journal post, “as profits are made from the market they add to the capital base and allow larger position sizes in subsequent trades to be taken. By implementing a strategy that encapsulates the turn over of the same capital in the market, (ie. velocity of money), you are in affect increasing the total amount of capital that is put to use in the market from which to generate profits”. This principle is the very core or essence of Active Investment – compounding profits in the market achieved by the turnover of trading capital.
In the previous SPA3 portfolio example (last weeks Journal post), the portfolio capital was turned over on average every 8.6 weeks or 6 times per year. As the portfolio has made profits, each time a slightly larger amount of capital was re-invested back into the market putting compounding to work.
The amount reinvested back into the market does not have to increase by a large amount. In fact a small percentage increase will have a significant effect over a longer period of time. Let’s have a look at several examples.
Suppose your trades always lasted 8.6 weeks and returned 2% on average. Each subsequent trade reinvested the original capital and the profit back into the market. After 5 years, your portfolio would achieve a total profit of 81%.
Now if you increase the percentage per trade to 3% or 4%, the total profit climbs to 142% and 224% respectively. You can see that the returns are exponential although the change is linear. From 2% to 4% is double but the end result is 2.7 times larger. This phenomenon is also obvious in the shape of the charts.
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Don’t forget the buy and hold issue
Don’t forget the buy and hold issue we referred to in last week’s post because it also applies in this case. If you were to only chose a handful of trades per year, the trades would have to average 19.4% just to achieve the same as the 3% compounding curve. The likelihood of an investor achieving this type of buy and hold performance through both good and bad markets is slim to none when taking into consideration that:
1. Some stocks could very well produce a negative return. 2. The performance of the All Ords Accumulation index over the past 5 years has only
risen by a mere 4.75% compounded percentage points per annum.
Compare this 4.75% compounded return of the All Ords Accumulation index to that of an active investment compounded strategy that achieves 16.79% over the same period, as has been the case with the SPA3 Public Portfolio from 1/7/2005 to 30/6/2010.
The key here is that you don’t need to make your annual returns from a handful of stocks. I’ll say it again; “Compounding through the reinvestment of profits back into the market is, in my opinion the “Holy Grail to Active Investment”. By executing a strategy that allows you to capture the trend of a trade, so your profit trades can run, and to close trades, so you can capture net profit and protect your capital from stocks that fail to rise, you will be in effect creating the compounding effect.
About the Author: Gary Stone is the founder Director of Share Wealth Systems and leads the Research and Development team. Trading and researching the markets since 1990, Gary is motivated by a conviction to help people do better. Share Wealth Systems are known for their trading systems SPA3 and SPA3CFD, designed for Long term, Medium term and leverage type investors and are a critical decision support tool that help guide investors through the market, no matter what the conditions
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Trading with the Single in / Scale out Method - Part 2 – Ross Beck
In the January Issue of Your Trading Solutions, we considered the benefits of trading multiple contracts with an approach that I refer to as the Single In/Scale Out method. If you didn’t have a chance to read that article, please do so as this article will pick up where we left off. Before we discuss the mechanics of how to liquidate the last contract of the Single In/Scale Out method, we will first discuss the use of the 3 Bar trailing stop. The 3 bar trailing stop is a useful mechanical device to liquidate an open position in an orderly and disciplined manner. To calculate a 3 bar trailing stop, look at the last three complete bars displayed on the chart. Complete bars are ones that are static or are not still in the process of being painted on a chart. If your position is long, you will be looking for the lowest low of the last three complete bars. If you are short, you will be looking at the highest high of the last three complete bars. It is just beyond this high or low that you will place your stop Typically, we will put a stop one tick beyond this high or low bar. The only caveat to the above rules is that you cannot include inside bars in your calculation of the previous 3 complete bars. An inside bar is a bar where the range from the high to the low is within the range of the bar that is immediately preceding it. Remember it can only be an inside bar in relation to the bar immediately to it’s left, not in relation to the bar two bars ago or three bars ago. Also a reminder for candlestick traders; we do not care about the opening and closing prices with this trailing stop, it only considers the extreme highs and lows. An example of an inside bar can be seen here in Figure 1; Notice that the range of the bar that is marked as an inside bar is inside of the range of the bar that is labelled as bar 2? In Figure 1 we are going to calculate a 3 bar trailing stop on a short trade. Working from right to left we are going to count back 3 bars and label them on the chart. The first bar on the right we will label as bar number 1 as this is the last complete bar on the chart. The chart is daily and regardless of whether a new bar starts to paint on the chart, we will not use any of that new information in the calculation of our stops. Notice that bar number 1 is not an inside bar, so we will label this bar as the first bar of three. Working from right to left, notice that the bar immediately to the left of bar number 1 is an inside bar so we will not include that bar in the 3 bar count. Working again from right to the left, we see that the next bar is not an inside bar so we will label that one as bar number 2. Proceeding to the next bar to the left of bar number 2, we find a bar that is not inside the range of the bar beside it, so we can count that bar as bar number 3.
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Figure 1: 3 Bar Trailing Stop with Inside Bar
As mentioned, we are short in this silver trade so we now need to find the highest of the three bars that we have labelled. As you can see, bar number 3 is the highest high of the three bars in question, so this will be the place to put a stop. The assumption is that the downtrend would be over if the market takes out the high of bar number 3. One piece of advice/ don’t put your stop exactly one tick beyond the range of the bar if the number ends with a 5 or a 0. Put it just beyond the range of the 3 bar high or low, and pick unusual numbers that people don’t typically use such as 67 or 74 or 38. This reminds me of bidding on Ebay. If you’ve ever bid on something at Ebay, have you ever lost to someone that outbid you by 1 cent? This happens when we put in a maximum bid on an item with a number such as $20.00. The experience “Ebayer” knows that some inexperienced bidders will bid at $20.00, so he puts in a maximum bid for $20.01 and wins by a penny. This also happens with trading. So in view of the foregoing, if you were long and thinking of putting a sell stop in at $20.00, change it to $19.86 or $19.93 or some other random number to avoid getting stopped out unnecessarily. Going forward, as new bars continue to be added to the right side of the chart, there will be a need to recalculate our 3 bar trailing stop to determine if the stop is still on the highest high of the previous three bars. Eventually, the market will exceed the highest high of the previous three bars and you will be stopped out. The result of the trailing stop that we initiated in the trade above can be seen in the chart below in Figure 2. I left the 1, 2, 3 labels on the screen so that you can see where we put the trade on. The crooked line displayed above the highs is an automatic X bar trailing stop available as part of the Beck Tool Group add on module available through Market Analyst. In this example you would have been stopped out based on the high of June 26, 2009.
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Figure 2 : 3 Bar Trailing Stop Indicator
To manage the last position of our Single In/Scale Out Method, we will use a three bar trailing stop but we are going to use it on the next larger time frame. Our initial trade set up was on the daily chart, so now we are switching gears to the weekly AUD/USD chart. As you can see below in figure 3, the Gartley Pattern is still visible and I have included the profit targets and stop levels for our single in/scale out strategy. Figure 3 : Changing from Daily to Weekly
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As noted on the chart above in figure 3, if we use a three bar trailing stop, we have to look back at the last three complete weekly bars on the chart to determine where our stop should be located. The lowest low of the previous 3 weekly bars is the low of bar number three at .6853. Notice that this low is below our entry price of .6910. With that being the case, we will not employ the three bar trailing stop on our weekly chart until it exceeds our entry point at .6910. In other words, until the three bar stop is above our entry point, we won't use it. The idea is that we don't want to lose any money on the remaining contract; so that means that the three bar trailing stop will only kick in when it is above our entry point. The chart below, figure 4, shows us when the three bar trailing stop begins to take effect. In figure 4 we can see that the three bar trailing stop on bar number 3 is now above the entry price of .6910. Now the 3 bar trailing stop kicks in on the weekly chart, and we have our "lottery ticket." The result is on the next page in figure 5. The line shown under the bars in figure 5 is an automatic 3 bar trailing stop available in Market Analyst. The 3 bar trailing stop on the weekly AUD/USD would have kept us in the trade for over three months until we took off our last position at .7680. Figure 4 : 3 Bar Trailing Stop Above Entry Price
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To review these two articles on the Single In/Scale Out strategy, we had an initial risk of 450 points. Hitting the first target paid us 75 points and reduced our risk to 75 points or 83%. The second target paid us 150 points and our stop was move to entry, thus theoretically eliminating the chance that our profit would turn into a loss. The last position or "lottery ticket" was liquidated for a 770 point profit. The single in/scale out strategy works well in all markets and all time frames. Regardless of what trading system you like to use, do yourself a favor and start using the single in/scale out money management strategy with your existing trade setups; you will be glad you did! Figure 5 : In Scale Out Strategy 16.91
About The Author: Ross L. Beck, FCSI is VP of Business Development for Market Analyst International PTY LTD. Ross is also the author of The Gartley Trading Method by Wiley Trading and is a member of the Market Technicians Association of New York. Ross has also received the DMS (Derivatives Market Specialist) and FCSI (Fellow of the Canadian Securities Institute) designations from the Canadian Securities Institute.
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“Speculation is a hard and trying business, and a speculator
must be on the job all the time or he’ll soon have no job to
be on.” - Jesse Livermore
“The average man doesn’t wish to be told that it is a bull or a
bear market. What he desires is to be told specifically which
particular stock to buy or sell. He wants to get something
for nothing. He does not wish to work. He doesn’t even
wish to have to think.”
- Jesse Livermore
“If somebody had told me my method would not work I nevertheless would have tried it
out to make sure for myself, for when I am wrong only one thing convinces me of it, and
that is, to lose money. And I am only right when I make money.” - Jesse Livermore
“The price pattern reminds you that every movement of importance is but a repetition of similar price movements, that just as soon as you can familiarize yourself with the actions of the past, you will be able to anticipate and act correctly and profitably upon forthcoming movements.” - Jesse Livermore
“It is literally true that millions come easier to a trader after he knows how to trade, than
hundreds did in the days of his ignorance.” - Jesse Livermore
“If I hadn’t made money some of the time I might have
acquired market wisdom quicker.” - Jesse Livermore
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Developing a System
I am revisiting an interview I did with LTC Ken Long, a systems expert with the U.S. Army. Here’s what Ken said about developing a system:
Define Who You Are: “Before you conduct any planning or system design, you must have a thorough understanding of who you are and what your objectives are. Individual investors, private hedge fund managers, public mutual fund managers, and trust managers will have different dynamics, time frames, and risk profiles. This relates to system design in that the final product must fit the circumstances and dynamics of the group or individual. If you jump into system design without considering these basics, you will sow the seeds of future problems.”
Objectives: “In trading system design, the problem is to define what you want the system to accomplish. With as many ideas, events, circumstances and adjustments that occur in system development, you have to have your objectives crystal clear in your mind. If you don’t know where you are going, then any old road will do.”
“Objectives give you the basis for making choices and prioritizing actions. This is not to say that objectives are static. In fact, they can change as you discover either unexpected limitations or advantages in your system as it matures. But before you start you must have an initial set of goals and objectives to guide you.”
Calibration: “After the system is deployed and operational, part of the process of calibrating the system is checking to see if the objectives still fit the person or organization that you have become. That’s a very exciting part of system design. I can’t tell you how often I’ve been part of a design team that started with a limited set of objectives and discovered in the “imagineering” phase that by adjusting our sights we were able to accomplish far more for much less. But, you have to start somewhere. If you don’t start with objectives, you are spinning your wheels.”
I posed this question to Ken: “This section is critical. How will you know if your system is working or not? What are your performance benchmarks? What are your criteria for knowing that your system is not working? How will you make decisions when these criteria are met? Will you scrap everything or just make position sizing adjustments?" All of these questions are critical to developing and operating a good trading system.
Developing a System – How to Make Decisions Within the System
- Dr. Van K Tharp
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How to Make Decisions Within the System
Here’s what Ken said about this critical topic:
“If you don’t work out how you will make decisions ahead of time, then you will certainly have to sort it out at the time of the first difficult decision. If you make decisions on the spot, with no guidelines, you have two problems: 1) figuring out what to do and 2) how to do it. And these problems must be faced under great stress and limited time. It’s better to calmly sort out the decision making process ahead of time so that the decision mechanism is agreed to before hand.” “In the Army, no plan usually survives the first contact with the enemy, and so our goal in planning is to develop a range of alternatives that can apply to a number of scenarios. Through rehearsal and analysis, we know which strategy works best for a given set of conditions. The goal of strategy development is to provide the decision maker with a menu of choices that are robust enough to cover a wide range of contingencies.” “In general system development then, we look for robust, simple plans that can cover a wide range of conditions. When you pre-plan like this, you don’t try to force the world to adapt to your plan. If you fall in love with a strategy and become emotionally invested in making it work no matter what the market or the world says, you lose the ability to adapt and learn.” “A real world example for a trading system might be a trader who decides to check his actual trading performance every month against the calculated system expectancy, and determine the statistical significance of the variation. He might decide that any result greater than one or two standard deviations is a signal to stop trading and recalibrate the system or reconfirm the validity of the trading model and its underlying assumptions. If the actual expectancy is close to the predicted expectancy, then the trader knows he’s on target. In modern manufacturing systems this concept is called “Statistical Process Control.” “It lets the system controller know when the production machines are drifting out of tolerance and degrading the quality of the output to the point where the line is stopped and the machines are retooled.”
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I asked Ken about how his advice applies in view of the fact that many trading systems are automated. Here’s how he responded:
“It’s a general problem of the information age, which provides us with a wide range of automated decision support systems that can compile massive amounts of data, analyze and process it, and present us with decision packages for action based on criteria that we can specify. I use a lot of these. However, the key to making them work is to make sure that you understand the underlying business model and system logic. When you do things automatically by computer, you need to understand what the computer is calculating and filtering. I won’t use power tools until I know how they work and I have mastered their use in simulations.”
“If you have done all the preparation work that you outlined in your system design
workshop,4 and you have chosen indicators that provide you the right signals for
making your trading decisions, then the right thing to do is to rely on the signals to make your decisions. Periodic calibration of the system, however, is still necessary to confirm that you have chosen the correct signals and that your actions are correct. If you have not done that work though, it may be the case that you simply picked up the latest hot indicator and are using it regardless of how appropriate it may be for your trading system. If it fails to work as advertised, you are likely to dump it for the next hot idea that comes along. Then you’re not a system’s trader, you are only reacting to advertising.”
Notes
4. The workshop Ken is referring to is the, How to Develop a Winning Trading System That Fits You workshop, which we offer once or twice each year.
About the Author: Trading Coach Dr. Van K Tharp, is widely recognized for his best-selling book
Trade Your Way to Financial Freedom and his classic Peak Performance Home Study Course for
traders and investors. Visit him at www.iitm.com for a FREE trading game or to sign up for his
FREE weekly newsletter.
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Product Description
The Amazing Life of Jesse Livermore
Subtitle: World’s Greatest Stock Trader
Jesse Livermore is considered by many of today’s top Wall Street traders as the greatest trader who
ever lived. For the first time, in one book: his trading secrets, techniques and stock market methods
are revealed. Livermore broke new ground in trading the market. His timing techniques, money
management systems, and high-momentum approach to trading in stocks and commodities were
revolutionary, and remain valid today.
Livermore ran away from home in 1891 at 14 years of age, with five dollars in his pocket, and
immediately started as a board boy in the offices of Paine Weber. He made so much money he was
banned from the "Bucket Shops" of Boston and New York. He made a fortune in the crash of 1907,
and later lost it, only to make it and lose it several more times.
Click directly on the image to
purchase this book
Each issue we will feature a Review from Amazon.com about a book that we would
recommend for your Trading Library. If you would like to purchase the book each month
simply click on the image and you will be taken directly to our Amazon A-Store to securely
take your order.
33 | P a g e
In the panic of 1907, J. P. Morgan personally implored Livermore to stop selling-short, stop pounding
the market into oblivion. He made 3 million dollars in one day during the panic.
He married a beautiful Ziegfield Follies showgirl. They lived in a magnificent mansion on Long Island
with 14 servants and a three hundred foot yacht, anchored off the back yard that ferried him to Wall
Street every morning.
He sold the market short before the crash of 1929, and entered the depression with 100 million in
cash.
A mysterious and secret trader, he worked out of a palatial penthouse, a highly secure office-fortress
on Fifth Avenue where he traded in absolute secrecy. Once the market was open, no one in the
office was allowed to speak until the market closed.
In 1935, Dorothy, his beautiful wife, shot their son, Jesse Livermore, Jr., in a heated, drunken
argument in Santa Barbara. It was one of the great scandals of the era.
Jesse Livermore ended his own life with a self-inflected bullet to the brain, ending one of the most
dynamic careers in Wall Street history. A complex genius whose life ambition was to win on Wall
Street and he did.
Customer Review
AN EXCELLENT BIOGRAPHICAL PORTRAIT OF A WALL STREET KING
This book provides an excellent biographical portrait of one of the greatest Wall Street speculators
that ever lived. This book is well researched and well written. In fact, as Livermore's life story unfolds
in the book, the reader begins to feel as though they are eyewitnesses to the time. The reader gets
to experience Livermore's triumphs and defeats. In the end, the reader will find that Livermore's life
mirrored the stockmarket more than the life itself. This man's life ran with the bulls and the bears
culminating in one big crash. Ultimately, Jesse Livermore died of lead poisoning, a fatal gunshot
wound to the head.
If it is one's intention to garner the "Livermore Key" to profits in the stockmarket then this is
definitely not the book. While the author briefly touches on Livermore's tactics and attempts to tie it
into current stocks, the information provided is rather general and somewhat vague. The reader
would be better off looking elsewhere for investment advice. However, if you are truly interested in
Livermore himself then you might consider it. In the final analysis, while this book is a good one it
really does pale in comparison to Edward LeFevre's classic book "Reminiscence of a Stock Operator."
LeFevre's book speaks to the reader while Richard Smitten's new book is more of a third person
account leaving the reader as more of an observer.
